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Simple IRA to Simple 401(k) Midyear Conversion


Guest mfitzgerald
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Guest mfitzgerald

I have a client that wants to convert their current Simple IRA plan to a 401(k) plan midyear when they have already made contributions to the simple IRA's. I know the simple rules in regards to maintaining more than one plan and the rules regarding termination of the simple plan, so I know that a regular 401(k) is out.

However, I am wondering if we can ammend the simple IRA plan into a Simple 401(k) plan? It appears that the plan would remain under the Simple umbrella and would therefore satisfy the requirements that the plan remains a Simple during the year and that more than one plan is not in effect.

I have run across section 4©(1) that states that a plan cannot have contributions to another 219(g)(5)(A) or (B) plan during the same year and the Simple IRA is listed under this description. So the question is, for purposes of determining a simple plan, is a Simple a Simple, or does the IRA and 401(k) create differences that makes them mutually exclusive of each other? It appears to me that the major difference is the omnibus account and not the regulations surrounding simple plans in general.

With this in mind, can we ammend the plan to become a Simple 401(k) now or are we required to terminate the Simple IRA at the end of the year and roll out a new Simple 401(k)?

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  • 3 months later...

No. An IRA-based plan cannot not be amended into a qualified plan. If the qualified plan is adopted the SIMPLE-IRA contributions become excess contributions and are (arguably) treated as wages under the Code. However, under the EPCRS (see section 6.10(5) of Rev. Proc. 2006-27) the excess contributions can arguably be retained or returned to employer (as specified therein).

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M,

I am curious ...where have you found SIMPLE 401(k)s? I have checked with almost every major (and some non-major) financial institutions, and it seems no one if offering them.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
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  • 2 weeks later...
Guest mfitzgerald
M,

I am curious ...where have you found SIMPLE 401(k)s? I have checked with almost every major (and some non-major) financial institutions, and it seems no one if offering them.

You need to start with a record keeper. I know that most of the independent record keepers that offer unbundled approaches will allow you to run a simple 401k. It is usually just a checkmark in the plan documents that states something like "this plan is intended to be a Simple 401(k)."

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Guest mfitzgerald

Gary,

Thank you for the response. On an even more simple note, is a SIMPLE 401(k) really a qualified plan? I guess my question is that are we ammending an IRA plan to become a qualified plan, or are we ammending a SIMPLE plan to accept 401(k) contributions? If it is the latter and the SIMPLE rules still apply it would seem that the plan would retain the SIMPLE qualifications and would not be a qualified plan.

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I guess my question is that are we ammending an IRA plan to become a qualified plan, or are we ammending a SIMPLE plan to accept 401(k) contributions?

Neither. You are ceasing sponsorship of a SIMPLE IRA, and starting a new SIMPLE 401(k). If it were me, I'd do it at the end of the year; I believe the restriction on having a SIMPLE IRA in the same year as any other plan includes SIMPLE 401(k)s (as "any other plan"). If I can ask, why do you find a SIMPLE 401(k) to have any useful purpose?

Ed Snyder

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